Monthly Archives: May 2011

We would like to thank personally all 1,335 of you who took the time to compete our State of Outsourcing 2011 study we're conducting with the London School of Economics Outsourcing Unit. This is the largest ever study that's looked at outsourcing, which included all industry stakeholders (buyers - both business ops and IT practitioners, service providers and advisors). A special shout also goes out to our partner, the Sourcing Interests Group, for inviting their members to participate, in addition to our 53,000 loyal readers.

We've been sifting through the findings these past few days, and let's start here:

Engagements struggle to deliver business value beyond cost reduction

Whatever the motives buyers have when they outsource, the first critical metric they must reach is to save the money they were promised at the onset of the engagement. And we have spectacularly good news for the entire outsourcing industry - the cost savings targets are being met - and being met well, with over 95% of current buyers viewing the engagements as effective for reducing their operating costs. And half of them are really pleased with their cost-reduction progress, the other half seeing progress as "somewhat effective". However, that's pretty much where the good news tapers off, as the rest of the results are pretty modest...

Let’s face it: Outsourcing is one of the most difficult businesses where you can charge a premium. Margins are constantly squeezed, and the only way to increase profit is either to become more efficient, or win lots of new business (lots is important, because the cost of sales is through the roof, too). CSC, with its latest results, has failed to do either, with flat revenues and declining profits.

It’s hard to be CSC. A perennial subject of acquisition chatter, it has built in poison pills in the form of gnarly government contracts with lots of limitations on who can own them and what can be done with them. This represents a disproportionate part of their revenue when compared to their competitors. This is not all bad. Government work tends to be stable, durable, and high margin, if notoriously slow to close. But acquiring government work is expensive, and if CSC has operationally squeezed out all the margin that it can out of its behemoth public sector contracts, then investors should prepare for many more quarters of bad news. An outsourcing company that is not getting more efficient at constant revenue might just be in trouble.

Again, its hard to be CSC. It lacks the scale of IBM and HP, the brand and loyalty of Accenture, and the relatively low overhead of the leading Indian IT providers. It is, effectively, stuck in the middle, similar in size and approach to European competitors that most of the time don’t bother to compete with these companies we listed. But even those European competitors have a more defined brand and mission in the enterprise world (as opposed to strength in the public sector).

So what can CSC do to show the world better numbers three months from now?

Be absolutely ruthless in streamlining operations. Review every account for opportunties and have the difficult conversations with the clients and account managers.

Turn on the enterprise sales engine. If the excuse for poor performance is “government contracts are slow,” well, then, get out there and win some non-government business!

Invest in the brand, especially in the enterprise market.

Study larger acquisitions that will create a splash while adding scale, new capabilities and price competitiveness. Heaven forbid, maybe it could even start to look at developing some BPO expertise that could be very effective in some of its core industries such as healthcare and manufacturing. It could even look to support public sector shared services initiatives as it seeks to streamline operating costs.

CSC is a capable, trusted veteran of this industry, and it need not disappoint the market—but it does need to refocus and find a new direction, if it is going to keep pace with the competition.

No single business function has been as discombobulated in recent years than marketing. The profound shifts to digital media, the rapid evolution of social media and intensifying globalized business environment, have raised the pressure on CMOs to unprecedented levels.

The answer's simple, my dear Watson...

The CMO's job has become a poisoned chalice - he or she is left trying to bring together many disparate functions and processes and report to their leadership how to measure, monitor and plan for future business success. Marketing is all about satisfying customer needs and wants profitably, and delivering a first-class customer experience, and HfS believes that marketing optimization is going to become a growing value-service than the BPO industry needs to deliver: from lead generation through to churn management, from maketing operations though to campaign management.

Bottom-line, the C-Suite cares passionately about how their products and services are marketed: this is not a business function (like others we can mention) which they are prepared to see its effectiveness decline.

HfS analyst Euan Davis, who is examining this secular shift in the world of the CMO, recently took time out to digest IBM's new bumper CIO survey, and has some takeaways on how the CIO needs to get really close to the CMO to help them through their current predicament. Over to you , Euan...

IBM’s Institute for Business Value (IBM Global Services’ executive research group) announced findings from its huge CIO survey undertaken every 2 years (click here for more details). It’s a massive piece of work involving 3000 one hour face-to-face interviews with CIOs from around the world—this year it has some great news for CMOs.

As HfS Research Fellow Keith Strodtman continues to shake the world of HR Outsourcing from its malaise, his next stop was benefits outsourcer Mercer's analyst sojourn at the sumptuous Starlite Motel, Jersey City. Oh wait - my apologies - I am getting confused with the HfS sales offsite - the Mercer do was at the Mandarin Oriental in D.C. (which, in my opinion, doesn't really have the personality of the Starlite...). Over to your Keith...

Mercer Analyst Day Report Out

Mercer kicked-off its annual customer conference with an analyst and influencer briefing at the lovely Mandarin Oriental Hotel in Washington D.C. on May 9, 2011. Mercer generates $3.5 billion in revenue from it HR consulting, outsourcing, and investment services businesses. It operates in over 40 countries and has more than 20,000 employees. Mercer executives presenting at the event included Jeff Miller, President and Group Executive – Outsourcing, Pat Milligan, President – Human Capital, Michael Sternklar, US Business Leader – Outsourcing, Mary Tinebra, Global Head of Business Development and Alliance – Outsourcing, and Kim Seals, Global Leader, Human Capital Operations and Technology Solutions. In this post, I will provide a few of the key observations from the event. For a comprehensive report of the day’s information please read my HfS Research RAPIDInsight.

Mercer has three primary business units. Consulting is the largest of the units with about $2.4 billion in revenue. Outsourcing brings in $700 million in revenue and Investment Services brings in $400 million in revenue. The outsourcing unit, which serves 10.1 million employees across 2,800 customers, is comprised of:

After 14 years, the effervescent Pramod Bhasin, now in his 60th year, is handing the reins to “Tiger” Tyagarajan, the company's current COO, and long-serving member of the leadership team.

There was never any secret that Tiger would eventually take the helm from Pramod, however, this is interesting timing following its Headstrong acquisition, recent staving off of acquisition speculation, and its successful emergence from the Recession.

Firstly, HfS would like to express its best wishes to Pramod on his new non-executive role, and congratulate him on building a unique BPO organization that took on the likes of Accenture, Capgemini, HP, IBM and Xerox (ACS) when it was merely a commercial spin-off of GE's F&A captive, to become one of the "Big 4" F&A BPO organizations today, with revenues now well past a billion dollars. You can read a dynamic three-part interview we ran with Pramod last year here. However, it so often takes one type of leader to get a firm to one billion and another to get it to five. The politics change, the amount of "hands on" involvement the CEO can have with clients and staff becomes very challenging, and the role often requires a different type of personality.

HfS believes the forthcoming appointment of Tiger is the right timing, and Tiger is the right man for the job for the following reasons:

HfS Research attended Cognizant’s annual analyst meeting earlier this week. And while we attend many of these sessions over the course of the year, Cognizant is at present the darling of the IT offshore services and outsourcing industry for its consistent and impressive growth and positive levels of customer satisfaction, so we thought we’d share some impressions with our readers.

Cognizant's "Future" Quandary: more of the same?

Cognizant is driving its momentum through a framework it calls The Future of Work, a compelling, if undifferentiated, model that integrates thinking about emerging technologies, social media, globalization and the millennial worker. We believe it is the last category that has a shot at actually becoming a winner for the company—everyone else is also talking about the other three, so that’s just really become a race to execute.

However, given that talent makes or breaks this business, and given that the vast majority of Cognizant’s 100,000+ employees are - and will - continue to be millennials, this is a really smart area of focus. If (and this is a big if) it can lend its young-worker expertise to clients, it becomes even more compelling. We don’t see any outsourcing provider with this level of focus and commitment to this topic. Many will talk about it, but with Cognizant the issue feels real, and there are funds and resources committed to it. It will be interesting to see if the same messaging and programs work with Indian millennials as they do Western ones—even if this is the most global generation yet. Work cultures and attitudes can vary greatly across regions and HfS Research sees these differences as real impediments to implement this strategy globally.

Keith Strodtman, HfS Research Fellow, was in the Big Apple to attend ADPs' analyst day. And for the very few of you who don't know Keith, he was recently running Ceridian's HRO business for many years, until joining the HfS Research family... so picture the dynamic :)

Here's his report as the firm tries to move beyond payroll. Take it away, Strodders...

Strodtman puts ADP under the glass. Click to read the HfS RAPIDInsight.

ADP Analyst Day Report Out

Fresh off of its solid third quarter earnings release, ADP hosted its annual Analyst Day meeting on May 4 in New York City. The event was held at the New York Hilton, the traditional site of the former HRO World conference that for many years served as an annual “reunion” for those of us in the HRO industry (R.I.P. HRO World). ADP executives, including CEO, Gary Butler, Regina Lee, President of Major Accounts and Small Business, Carlos Rodriguez, President of National Accounts and Employer Services International, Mike Capone, Corporate Vice President and CIO, Jan Siegmund, Chief Strategy Officer and President of Added Value Services and several other senior executives delivered an information packed day full of product updates, market updates, and key initiative overviews. In this post, I will provide a few of the key observations from the event. For a comprehensive report of the day’s information please read my HfS Research Rapid Insight report found at hfsresearch dot com.

Most people are familiar with ADP as a payroll processor, but few providers can claim the broad range of other HR services that ADP has to offer. It HR services include:

With that Great Nasty Recession finally behind us, are organizations increasingly turning to outsourcing their IT and business processes, or are they looking at other sourcing strategies to optimize their operations?

What's your outsourcing state? Click here to partake

Whether you buy, sell, advise or analyze outsourcing services, YOUR opinion is critical for our new study we're conducting with our professorial friends at the Outsourcing Unit of the London School of Economics.

This will take no more than 10 minutes to complete whereby you have can receive a complimentary executive summary of the survey findings and participate in a random draw for an iPad 2. Please remember that we will always treat all your personal data with the strictest confidence.

Coincidentally, our resident utility player, Esteban Herrera (COO and SVP Research) has a long background in the Utilities space.

So we knew when he teamed up with Reetika Joshi, HfS Research Contributing Analyst for BPO Strategies, we'd see a great result. Now that the report is available on HfSResearch.com, Esteban has taken a breath to give you some background on what he and Reetika uncovered.Take it away Esteban...

Utilities: Next Practices for a Stealth Outsourcing Giant

Shhh… Don’t tell anyone, but while most of us weren’t looking, the utilities industry quietly racked up $25 billion in annual spend on outsourcing—that’s in the US alone! How did this happen? How did this get past the regulators and the unions? Who knew that outsourcing would not only grow, but stick, in this most conservative of industries?

The next generation business platforms for the industry will be built not by utilities themselves, but by collaborative alliances of clients, outsourcing providers, and hardware and software vendors. From plug-in electric cars to alternative sources to a flood of new regulations to demand-response-based pricing, the requirements for change in the industry are simply too many, too frequent, and too capital intensive for each company to develop on their own. It simply is not efficient for the industry if each company builds out its own platform for the next generation business model.

When Tony Filippone joined us recently, we knew we were in for a treat. Not only is he a recognized expert in the fields of governance and healthcare, but he's also a heck of a speaker (he did, after all, snag an MA in Communication Management from the USC’s Annenberg School for Communication).

So, we couldn't wait to sit down with Tony for a podcast recording to hear what's in store for you in the coming months, now the "Governator" is officially onboard, and has bags of free time to dedicate to us with the Lakers NBA ambitions emulating the political aspirations of Donald Trump.

So... sit back, relax and enjoy this edition of the HfS Podcast, with Tony "The Governator" Filippone.

EXL and OPI, two of the smaller Finance and Accounting BPO (F&A BPO) providers, and both recently touted as acquisition candidates in HfS Research's 2011 F&A BPO market landscape, have tied the knot in a surprising merger, in this rapidly-consolidating and transmutating BPO market. Not only that, HfS has officially uncovered the undisputed proven fact that Bulgaria is home to the world's second-most intelligent people, according to MENSA's IQ scores. Yes, EXL now has an operation there.

Already this year, we have seen bold moves from HOVS to acquire SourceCorp and Genpact with Headstrong. It appears that the leading "pureplays" (whom we won't be calling pureplays anymore) are seeking to bolster their scale, service portfolio and industry competency, while several of the larger IT-centric outsourcers watch curiously from the sidelines as their BPO heads anxiously try to convince their boards of tech-lovers that offshore IT services growth isn't infinite, and if they don't invest in their BPO competencies soon, will face a very tough task to infiltrate this market in the future.

I have long-admired EXL as a business, since the early days of its IPO - its clients are like a who's who of insurance giants. EXL has focused expertise in complex areas of insurance, namely risk management, analytics and compliance, in addition to transactional process. It has also been quietly developing its excellent LifePRO platform for or life, health and annuity insurance.

Still trying to figure out what we do? Still wondering what all these mischievous-looking chappies are up to? Well, your thirst for knowledge can finally be slaked by attending our hastily-convened special webcast, where we'll be joined by our friends and partners at the Sourcing Interests Group (SIG) for a one-hour interactive session entitled HfS Research Up Close and Personal on May 5 at 2:00 pm ET.